Economic Moat (Competitive Advantage)
Definition
An economic moat is a durable competitive advantage that allows a company to maintain high profitability and defend its market position against competitors over long periods. The term was popularized by Warren Buffett.
Moat Strength = (ROIC − WACC) × Duration of AdvantageHow to Interpret Economic Moat (Competitive Advantage)
The stronger the moat, the longer a company can sustain above-average ROICs. We evaluate five moat sources: brand power (pricing premium), switching costs (customer stickiness), network effects (value grows with users), cost advantages (structural efficiency), and intangible assets (patents, licenses, regulatory barriers).
Why It Matters for Investors
A moat is the defining characteristic of a compounder. Without a durable competitive advantage, high profits attract competition that erodes returns. Companies with wide moats can sustain high ROICs for decades, making them the best candidates for long-term compounding.
Frequently Asked Questions
What are the 5 sources of economic moats?
Brand power (pricing premium), switching costs (hard to leave), network effects (more users = more value), cost advantages (structural efficiency), and intangible assets (patents, regulatory barriers).
How do you measure moat strength?
We look at ROIC stability over 10+ years. A company that maintains ROIC above 15% through multiple economic cycles almost certainly has a wide moat.
Can moats disappear?
Yes. Technological disruption, regulatory changes, or management mistakes can erode moats. That is why we continuously monitor competitive dynamics and update our assessments.
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